It is suddenly fashionable on the continent to talk of a banking Union. The EU assures us this is one way that they can advance their goal of “deeper economic integration”. They see this as necessary to help save the Euro.
Reading the EU’s document on what a banking union would look like, the first thing that emerges is they are well on the way to having one for all 27 member states of the EU anyway. There has been huge change in recent years, bringing into play the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational pensions Authority. These bodies at the moment co-ordinate and supervise the national regulators. The wish now is for them to do more, regulating the larger institutions in the EU directly, and becoming more detailed in how they tackle the national regulators. There will be more pressure for harmonised standards and approaches. They are floating the idea of one pan Euroepan bank deposit guarantee scheme, for example. The EU did intervene in the ways EU governments aided their banks during the crisis, and did impose some state aid rules on the subsidies.
The UK should have a problem with all this. If the Euro area wants a centralised approach to regulating its banks, that is one thing. If they wish to use the institutions of the 27, and impose the results on the UK, that should be another thing. The safest way for the UK to approach it is to insist that the Euro area has its own rules and institutions, but that would duplicate the institutions the 27 have already set up. The least bad way would be to give the new banking tasks to the European Central Bank, writing firmly into the rules that the powers only relate to Euro member states. If the EU 27 common institutions are to be used, the UK has to exempt itself from the application of their rules to us if it wishes to keep control over how it regulates its important financial service industry.
There are also problems for Euroland. The EU thinking seems to be in favour of higher capital and cash requirements. Whilst these would have been eminently sensible 7-10 years ago, to stop the bubble, today they may well delay the recovery. So far there has been little evidence of the restructuring , writing off and closing down the EU says it favours. The system is thriving on massive bail outs of damaged institutions. This does not provide a sure basis for growth. When linked to strict controls on the stronger banks, it produces a toxic cocktail of anti growth policies. Some in Germany are also now trying to limit the damage of this proposal, as they do not fancy Germany having to help guarantee the bloated balance sheets of weak banks all round the Euro area.